The Reserve Bank has this morning appeared before the parliamentary inquiry into housing affordability, and hosed-down demand-side measures aimed at improving housing affordability, noting that with Australia’s constipated supply system, measures that add to demand will simply be capitalised into higher prices:
…housing prices and affordability are affected by the interaction of both supply and demand factors. The factors that I have mentioned so far, such as household incomes and the cost and availability of finance, primarily affect the demand side of the market. In the short to medium term, it is these factors that will tend to have the predominant influence on housing price movements. The reason for that is that the supply side of the market is dominated by a large existing stock of dwellings, and new supply takes time to come on stream.
In the longer term, however, supply factors are critically important. It is the supply response that determines the extent to which additional demand results in higher prices over time…
Australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. There are also obstacles to affordable housing created by Australia’s unusually low-density urban structure, though this is gradually changing…
The general point I would make is that we can’t improve housing affordability simply by adding to demand. Targeted assistance can certainly help particular groups such as first home buyers, but without a supply-side response, any generalised increase in demand will just be capitalised into prices. Hence an important emphasis in our submission is that due attention needs to be given to supply-side factors in any policy response to perceived problems of affordability.
The flip-side to this argument, of course, is that policies that restrict speculative demand, such as quarantining negative gearing losses so that they can only be claimed against the same asset’s income, would manifest in lower house prices, thus improving affordability.
This is why action is required on both the demand and supply side to make housing more affordable.
